". . . for almost a century the basic principles on which this civilization was built have been falling into increasing disregard and oblivion." -- Hayek

Wednesday, January 16, 2013

Fiscal Responsibility

Given all the political talk in Washington these days of fiscal cliffs, deficits, and debt ceilings I wonder how many people, even how many of those doing all the talking, have much of an idea of what government's spending and taxing looks like of late? I have to pay attention to some of this because of the courses I teach, and I have my course Economics of the Public Sector coming soon. So, I thought I would spend some time, once again, with the numbers in the President's Budget Proposal for FY2013. I don't like looking at numbers that are only estimates, so I'm only paying attention to actual numbers for outlays and revenues.

Here is what the total picture looked like with respect to spending, revenues, and borrowing for the US Government, and for the last two fiscal years for which there is actual information. The numbers presented are in billions of dollars. In FY 2010 the US Government had revenue of $2,163 billions of dollars, while it spent $3,456 billions of dollars. In FY 2010 the US Government chose to borrow $1,293 billions of dollars. This means that for FY 2010 Congress and the President chose to borrow 37 cents of every dollar they spent.

The story is pretty similar for FY 2011. In that year the revenue was $2,303 billions of dollars while spending was $3,602 billions of dollars. In FY 2011 the US Government chose to borrow $1,300 billions of dollars. That means that for FY 2011 Congress and the President borrowed 36 cents of every dollar they spent.

The political talk these days often has one side of the political isle saying government has a spending problem and the other side counters by saying government has a revenue problem. It seems to me better to say the US Government has a borrowing problem. Can there be any justification, outside of events like WWI and WWII, for borrowing around 40 cents of every dollar spent? I doubt it, but the question does suggest we might wonder what the government spends $3.5 trillion dollars on, and what aspects of this spending justify borrowing around a trillion dollars annually.

It seems a rather challenging task to get deeply into the budget numbers for the entire US Government. So, I'm not going to get very detailed. Still, I think we can probably draw some conclusions by looking at what sorts of things Congress and the President have been spending the most money on of late. Consider the percentage of the entire budget spent by the largest four agencies of the US Government:

It is notable, I think, that these four agencies spent 80.2% of the entire amount of money spent by the US Government in FY 2011. The next largest agency in terms of spending was the Department of Agriculture which spent 3.9% of the total spending for the US Government. After taking the spending of these 4 agencies out of the budget, there are 24 remaining agencies which together spend the remaining 20% of total federal spending.

Just the largest 3 agencies together spent $2,353,515 million, or $2,354 billion, in FY 2011. In other words, the spending of just three agencies exceeded the government's revenue of $2,303 billion in FY 2011. In a sense, then, in FY 2011 members of Congress and the President decided to borrow 40 cents of every dollar they spent in order to operate the rest of the 25 agencies of government. Wow!

Take a look now at 3 of the programs the 2 largest agencies spent money on:

Add these 3 programs together to get $1,296,282 million, or $1,296 billion, in FY 2011. Members of Congress and the President borrowed $1,300 billion in FY 2011. Thus, another way of trying to put the fiscal actions of the US Government into perspective is to say that in FY 2011 the money that was borrowed was borrowed in order to pay for just three programs: Social Security, Medicare, and Disability.

It seems to me we should conclude that something has gone seriously wrong with the recent fiscal actions of Congress and the President. I don't think it is possible to justify borrowing the money necessary to operate 25 out of the 28 agencies of government. Nor do I think it is possible to justify borrowing the money needed to fund Social Security, Medicare, and Disability.

Or think about this. Social Security and Medicare combined account for almost the amount borrowed, and these two programs are for only one group of people, those who have reached "retirement age." I don't think it is possible to justify borrowing money to support programs for this group of people.

I'm sure some will complain that this way of thinking about government borrowing isn't sensible because Social Security isn't an entitlement program since people are just getting back their money from payments over the course of their working lives. But, Social Security has never worked this way in fact. It has always been a transfer program from those who are working to those who are retired. In addition, the numbers I'm using here combine all sources of revenue and types of outlays into the total budget numbers.

In any case, I suggest it is important to think about all the budget talk by the President and members of Congress these days in some conceptual way that allows us to emphasize what our political representatives are choosing to do when they borrow money on our behalf. It seems to me these two perspectives help in this regard. Also, please don't forget that when our representatives decide to borrow money on our behalf that we adults won't be the only people paying the money back. People who can't yet vote, our children, will also have to pay back money "we" borrowed for government today.

Perhaps there is another way to put the budget actions of Congress and the President into perspective. Even if our representatives in Washington wanted to balance the government budget, it is possible to over estimate the revenue and thus to be required to borrow to cover the difference between predicted revenue and actual revenue. But, if this reason explained the deficits then once in a while there would be a surplus, and the need to borrow would be just a few cents for every dollar spent annually, not almost 40 cents for every dollar spent. Borrowing as much money as they have recently suggests it is unreasonable to assume the borrowing is needed because of inaccurate revenue estimates. It seems better to assume other justifications are needed. Thus, another way of putting the budget actions of Congress and the President into perspective is to see any new spending as requiring new borrowing. As such, Congress and the President should be discussing why they want to borrow money for the new spending. For example, just yesterday the House considered spending, or should we say borrowing, an additional $50 billion for hurricane Sandy "relief." What reasons can justify borrowing money at this time for personal losses due to a hurricane? Perhaps there are in fact good reasons. But, if so, there is also the larger context that government has already found that it needs to borrow sufficient money to operate 90% of the government agencies.

It seems to me something has gone wrong with the US Government. It also seems to me that what has gone wrong is related to the easy way by which members of Congress and the President have come to accept borrowing more and more money to fund government. Perhaps the answer to what has gone wrong is to return to what Buchanan and Wagner (Democracy in Deficit)called the "Smithian principle of fiscal responsibility:"

Government should not spend without imposing taxes; and government should not place future generations in bondage by deficit financing of public outlays designed to provide temporary and short-lived benefits.

In other words, government should generally seek to operate without running a deficit.

1 comment:

MAGS
said...

It is quite suspect that the majority of these financial issues seemed to snowball after leaving the gold standard in the 1970s. Becoming a fiat currency, and changing the calculation of the Consumer Price Index to reflect a lower inflation rate allows for easy monetary policy and lowering social security payments that do not keeep up with the true rate of inflation. This leads to a lower standard of living, a society that is based on the accumulation of debt and a dollar losing 52% of its value since the Federal Reserve has created the funny money agenda. This type of policy from the Fed does not support its original mandates, instead it supports a spending frenzy in Washington, with less revenue and more debt, removes risk in the market, and provides capital to the institutions that caused this financial crisis. Interest rates have been kept at 0% for 6 years by the Fed, allowing for the Treasury to continue spending, and paying a lower interest rate on the debt. So Iguess interest rates will stay at 0 forever. HA